Most of the money spent on credit card debt is money that has been spend on consumer goods that has been used up and no longer has any value. As the recession gets started, credit card default rates are rising, and banks are left with nothing. Banks will likely go bankrupt if they can no longer collect on these debts.
This is a Bailout
Call it what you want, this is a bailout. The Fed is trying to bailout every dead-beat loan in an effort to save the financial institutions that hold together the fabric of the economy.
Last month, for the first time since the Great Depression, the Fed started accepting real-estate as collateral to borrow money with its 28-day ‘Term Auction Facility’. Now, they have expanded the list of collateral they will accept, to include car loans, credit cards and student loans.
The Fed is doing this because investors are not buying bonds backed by those assets, which is creating a political problem in an election year. Students can’t get college loans because investors won’t buy the bonds issued by the banks that made the loans. Young people are very powerful voters.
Reference Article : College Becomes a Bad Investment
Of course the Fed doesn’t have any money to trade the banks for their bad-loans, unless they print it. The more bad-loans that the Fed moves to its books the more debt the Fed takes on. Sooner or later, the Fed will have to do something with these bad-loans. Everyone in the country cannot go bankrupt. Somebody has to pay for the bankruptcies.
This strategy will create inflation for everyone that holds dollars – which means the entire world, as two-thirds of the dollars are circulating outside the US. The Fed government is forcing the world to pay for our consumer debt through inflation. How long with the world tolerate this?